Suppose you are asked to value, using a four-period risk-neutral binomial approach, an at-the-money call option. The stock price is $180 today but will, per period, either increase by 10% with 70% of chance or decrease by 5% with 30% of chance. The risk-free rate is 4% and the stock pays no dividends. What would be the value of this call option in period 3 assuming that the price has constantly increased up to that point?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Finance
Suppose you are asked to value, using a
four-period risk-neutral binomial approach,
an at-the-money call option. The stock
price is $180 today but will, per period,
either increase by 10% with 70% of chance
or decrease by 5% with 30% of chance. The
risk-free rate is 4% and the stock pays no
dividends. What would be the value of this
call option in period 3 assuming that the
price has constantly increased up to that
point?
Transcribed Image Text:Finance Suppose you are asked to value, using a four-period risk-neutral binomial approach, an at-the-money call option. The stock price is $180 today but will, per period, either increase by 10% with 70% of chance or decrease by 5% with 30% of chance. The risk-free rate is 4% and the stock pays no dividends. What would be the value of this call option in period 3 assuming that the price has constantly increased up to that point?
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